Futures Trading Guide for Beginners

Futures trading offers powerful opportunities for investors seeking exposure to commodities, financial instruments, and global market movements. However, for newcomers, the mechanics of futures—ranging from leverage and margin requirements to trading hours and order types—can seem complex. This comprehensive guide breaks down everything you need to know about futures in clear, actionable terms, optimized for both understanding and real-world application.

What Are Futures?

Futures are standardized contracts traded on regulated exchanges, obligating the buyer to purchase—or the seller to deliver—a specific quantity of a commodity, financial instrument, or index at a predetermined price on a set future date. Unlike spot markets where assets are bought and sold for immediate delivery, futures allow participants to lock in prices today for settlement at a later time.

These contracts are available across two broad categories:

• Commodity Futures: Based on physical goods like crude oil, gold, soybeans, or natural gas.
• Financial Futures: Tied to financial instruments such as stock indices (e.g., S&P 500), interest rates, or currencies.

Futures serve multiple purposes: hedging against price fluctuations, speculating on market direction, or diversifying investment portfolios.

👉 Discover how futures can enhance your trading strategy with real-time tools and data.

Key Features of Futures Trading

Understanding the core characteristics of futures is essential before entering the market.

1. Standardized Contracts

All futures contracts are standardized by the exchange. This means specifications such as contract size, quality standards, delivery dates, and settlement methods are pre-defined. Standardization enhances liquidity and ensures that all market participants trade under uniform conditions.

For example:

• One crude oil futures contract = 1,000 barrels.
• One gold futures contract = 100 troy ounces.

2. Exchange-Traded and Centrally Cleared

Futures trade exclusively on regulated exchanges like the CME Group, Shanghai Futures Exchange (SHFE), or Dalian Commodity Exchange (DCE). All trades go through a central clearinghouse, which acts as an intermediary between buyers and sellers, reducing counterparty risk.

Only exchange members can directly access the trading floor; retail traders must use a futures broker.

3. Margin and Leverage

One of the most distinctive aspects of futures is margin trading. Traders are required to deposit only a fraction of the contract’s total value—typically between 5% and 15%—to open a position. This enables significant exposure with relatively small capital.

While leverage amplifies potential profits, it also increases risk. A small adverse move can trigger margin calls or lead to substantial losses.

4. Two-Way Trading: Go Long or Short

Unlike traditional stock markets where profits come primarily from rising prices, futures allow two-way trading:

• Going long (buying): Profit when prices rise.
• Going short (selling): Profit when prices fall.

This flexibility allows traders to benefit in both bull and bear markets.

5. Daily Mark-to-Market Settlement

Also known as "daily settlement", this process recalculates gains and losses at the end of each trading day based on the closing price. Profits are credited, and losses are debited from the trader’s account immediately. If the account balance falls below the maintenance margin level, a margin call is issued requiring additional funds.

This mechanism prevents compounding losses and maintains market stability.

Futures vs. Stocks: Key Differences

These structural differences make futures ideal for active traders focused on short-term price movements.

How to Trade: Going Long and Short

Executing trades in futures involves simple but precise steps:

To Go Long (Buy):

1. Select “Buy” and “Open Position” in your trading platform.
2. Hold as the price rises.
3. Close by selecting “Sell” and “Close Position.”

To Go Short (Sell):

1. Choose “Sell” and “Open Position.”
2. Profit if the price drops.
3. Cover by choosing “Buy” and “Close Position.”

Note: Most platforms follow a "First In, First Out" (FIFO) rule for closing positions unless specified otherwise. Some exchanges offer “Close Today” options to manage intraday vs. carryover positions separately.

Common order flow indicators include:

• Double Open: Both parties open new positions → open interest increases.
• Double Close: Both close existing positions → open interest decreases.
• Position Rollover (e.g., Long Switch): An old long exits while a new long enters → open interest unchanged.

Trading Hours Across Chinese Exchanges

Futures markets operate beyond standard business hours. In China, several exchanges offer overnight trading sessions, especially for internationally linked commodities.

A full trading day often starts with the previous night’s session.

Major Chinese Futures Exchanges & Sessions

Night Session (Pre-Day Market)

• Starts: 20:55 – 21:00 (CST)
• Applies to: Energy, metals, agricultural commodities

• Examples:

  • Crude oil (INE): 21:00 – 02:30
  • Copper (SHFE): 21:00 – 01:00
  • Iron ore (DCE): 21:00 – 23:00

Day Session

• Morning:

  • Pre-open: 8:55 – 9:00
  • Trading: 9:00 – 11:30

• Afternoon:

  • 13:30 – 15:00 (most contracts)
  • Some financial futures extend to 15:15

Financial instruments like stock index futures (CSI 300, SSE 50) and government bond futures trade only during daytime hours.

👉 Access global futures markets with advanced trading tools and deep liquidity.

Understanding Margin Requirements

Margin is not a fee—it's collateral held by the broker to cover potential losses.

Margin Calculation Formula

Initial Margin = Contract Price × Contract Size × Margin Rate

Example:
Trading one lot of methanol at ¥2,650 per ton
Contract size: 10 tons
Margin rate: 12%
→ Margin required = 2,650 × 10 × 12% = ¥3,180

Brokers may apply higher margin rates than the exchange minimum for risk management.

How Futures Fees Work

Every trade incurs fees—both when opening and closing positions.

Fee Structures

• Proportional Fees: Based on contract value (e.g., copper at 0.0001% of turnover).
• Fixed Fees: Flat rate per contract (e.g., ¥8 per sugar contract).

Example Calculations

Proportional Fee (Copper)
Price: ¥62,500/ton
Unit: 5 tons/hand
Rate: 0.0001
→ Fee = 62,500 × 5 × 0.0001 = ¥31.25/hand

Fixed Fee (Sugar)
Rate: ¥8/hand
→ For 2 hands = ¥16

Some brokers charge extra for high-frequency trading or intra-day scalping.

Order Types and Price Execution

Choosing the right order type affects speed and execution quality.

Slippage Alert: Fast-moving markets can cause executed prices to differ from expected levels—especially with market orders during volatile news events.

Essential Futures Terminology

Here are key terms every trader should know:

• Open Interest: Total number of outstanding contracts not yet settled.
• Volume: Number of contracts traded in a session.
• Settlement Price: Reference price used for daily P&L calculation.
• Last Trading Day: Final day to trade a contract before expiry.
• Physical vs Cash Settlement: Most retail traders close before delivery; institutions may take physical delivery.
• Rollover: Closing near-month contracts and opening farther-dated ones to maintain exposure.
• Tick Size: Minimum price movement (e.g., $0.25 per barrel for oil).
• Daily Limit Up / Limit Down: Maximum allowed price swing per session.

Frequently Asked Questions (FAQ)

Q: Can I lose more than my initial margin in futures?
A: Yes. Due to leverage, losses can exceed your deposited margin. Brokers issue margin calls to cover deficits, but rapid moves can result in negative balances if not managed promptly.

Q: Do all futures contracts require physical delivery?
A: No. Most retail traders close positions before expiry. Contracts settle in cash unless explicitly designed for physical delivery (like crude oil or agricultural goods).

Q: What happens if I don’t close my position before expiration?
A: The exchange will automatically settle the contract based on its rules—either via cash settlement or physical delivery. Unexpected delivery can lead to logistical and financial complications.

Q: Why does trading volume matter?
A: High volume indicates strong market interest and tighter spreads, improving execution quality. Low-volume contracts may suffer from slippage and poor liquidity.

Q: Is futures trading suitable for beginners?
A: It can be—but only with proper education, risk management, and simulated practice first. Start small and focus on learning before scaling up.

Q: How do I choose which contract to trade?
A: Focus on the main contract—the one with the highest open interest and volume. These offer better liquidity and tighter bid-ask spreads.

👉 Start practicing with real-time data and low minimums—no experience required.

Final Thoughts

Futures trading combines analytical rigor with strategic timing. With leverage, flexibility, and access to global markets, it's a dynamic tool for modern investors. But success demands discipline: understanding margin requirements, mastering order types, respecting volatility, and managing risk effectively.

Whether you're hedging business risks or pursuing speculative gains, building a solid foundation in futures mechanics is crucial.

By applying the principles outlined here—from contract basics to execution strategies—you’ll be better equipped to navigate this fast-paced market with confidence.

Keywords: futures trading, margin requirements, leverage in futures, futures vs stocks, futures order types, commodity futures, financial futures